Fitch Affirms Italian City of Andora at 'BBB+'; Outlook Negative

Thu Dec 12, 2013 11:49am EST

PARIS/MILAN/LONDON, December 12 (Fitch) Fitch Ratings has affirmed the Italian City of Andora's Long-term foreign and local currency ratings at 'BBB+' and its Short-term foreign currency rating at 'F2'. The Outlook is Negative, mirroring that of the sovereign. Andora's rating affirmation reflects its solid finances, tight control over spending and debt-free position amid low capital spending pressure. The rating also factors in the city's strong cash flow generation sustained by high revenue collection rates. KEY RATING DRIVERS Andora's operating margin rose to 32% (EUR6m) in 2012 from 22% in 2011, aided by an increase of property tax on non-primary residences (IMU) and a stable cost base (EUR12.5m). Despite a resilient revenue structure, Fitch expects the margin to decline in the medium term and level off at EUR2.5m, or 15%, as national fiscal adjustment results in higher contributions to Italy's budget consolidation. The IMU on primary residence was replaced by national transfers in 2013 and by a new service tax which will be levied by cities from 2014. Fitch does not expect the replacement of the property tax with the service tax in 2014 to have a significant impact on Andora's revenue, as secondary residences outnumber primary residences by three to one. Nevertheless, residual flexibility on primary property and personal income tax (PIT) of about 10% of operating revenue may provide a buffer against any unforeseen spending or revenue shocks. Andora's GDP per capita is 5% above the EU27 average while unemployment was fairly low at 7% against the nationwide 12% in 2012. Andora's main activity is tourism, as evident in the ownership of second homes by residents from wealthy areas of Piemonte, Lombardy as well as from Germany and France. This boosts the local economy through high consumption and Fitch expects a recovery of GDP growth (-2% both in 2012 and 2013) to 1% in 2014-2015. Fitch expects Andora's investment to total EUR15m in 2013-2015, in line with 2011-2012. Due to the appeal of the Ligurian city for investors, Andora should benefit from an additional EUR15m of projects funded through public private partnership schemes. Such schemes tend not to weigh on the city's budget since costs are borne by contractors. Fitch's base scenario assumes debt funding would cover about 15% of capex, against Andora's forecasts of no new borrowing by 2015. Andora is debt-free. Even in a stressed scenario, with new borrowing covering 50% of investments in 2014-2015, debt protection through the current balance would remain at one year, while the operating balance would cover annual debt service by approximately 5x. Debt sustainability should therefore remain sound and compare well with national and international 'BBB+' peers. Fitch expects Andora to maintain strong cash generation, which in 2011-2012 led to EUR18m cash or around 1x the city's budget. Its portfolio of shareholdings, including stake in firms with generally balanced accounts, serves a buffer against budgetary shocks. RATING SENSITIVITIES The ratings would be downgraded if there is a substantial and persistent deterioration in the economic conditions impacting Andora's budgetary performance or if there is a downgrade of the sovereign. Conversely a rating upgrade would be dependent on an upgrade of the sovereign, provided that operating margin and debt remain in line with Fitch's expectations. Contact: Primary Analyst Sergio Ciaramella Director +39 02 87 90 87 275 Fitch Italia S.p.A. 1, Vicolo Santa Maria alla Porta 20123 Milan Secondary Analyst Raffaele Carnevale Senior Director +39 02 87 90 87 203 Committee Chairperson Christophe Parisot Managing Director + 33 1 44 29 91 34 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Tax Supported Rating Criteria', dated 14 August 2012, and 'International Local and Regional Governments Rating Criteria', dated 9 April 2013, are available at www.fitchratings.com. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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